Share this article

HOW THIS IS MONEY CAN HELP

Unarranged borrowing costs even more, with fees of £5 per day for amounts between £10 and £25, and £10 per day beyond that. This is on top of the standard £6 monthly overdraft usage fees.

So are the new fees any better?

According to personal finance expert Andrew Hagger of Moneycomms: ‘The new Lloyds Bank, Bank of Scotland and Halifax tariffs are slightly cheaper than its existing tariff due to the removal of the £6 monthly charge. However, the new 1p per day charge for each £7 borrowed still equates to an annual interest charge of around 52 per cent.'

HOW THE CHARGES COMPARE

Old fees for a Lloyds Classic Account:

Borrow £1,000 over 7 days and you pay £9.42

Borrow £30 over 2 days and you pay £6.01

Borrow £30 with an unauthorised overdraft and pay £10.20 for a day

From 2 November 2017 with a Lloyds Classic Account:

Borrow £1,000 over 7 days and pay £10.01

Borrow £30 and pay 4p per day (authorised or unauthorised)

Going forward some accounts will still come with a buffer, including the Club Lloyds accounts and the Halifax Ultimate Reward account.

There will be no unauthorised overdraft charges or monthly usage fees. Instead all customers pay a flat 1p per £7 borrowed every day.

Any transactions that can't be made because they take you beyond your limit won't be made, meaning there won't be any returned item fees.

So would you be better off switching?

If you think you are likely to stray into the red, choosing a better bank account can cut the costs of borrowing dramatically.

Penalties for even the smallest of transgressions can be astronomical, and some banks charge effective interest reaching 81 per cent.

Under the new charging system, a Lloyds Classic customer borrowing £500 for seven days will pay £4.98 over the week (six days at 41p and one day at 42p), according to the Lloyds fee calculator.

As the table below from Moneycomms shows, borrowing just £500 for a week through an arranged overdraft with First Direct's 1st Account sets customers back just 71p per day. But at the other end of the spectrum, those who bank with NatWest/RBS would pay over ten times as much at £7.75 per day with the Select account.

Hagger warns that borrowers should be careful when deciding between accounts with fixed fees for borrowing and those with traditional interest and usage charges.

He explains: 'Fixed fees (monthly or daily) are particularly expensive for small overdrafts and those lasting just a day or two – if you want to take it to the extreme the NatWest/RBS charge for a one day overdraft of £250 would be £6.12 – in terms of an equivalent interest charge it comes to 894 per cent - this highlights just how unfair the monthly fee can be as you are charged the same £6 fee whether you are overdrawn for one day or 30 days.

'Banks say daily fees easier to understand – that may be the case but for many people it can also prove to be far more expensive than a standard interest rate tariff without a fee.'

Our pick of the cheapest accounts for overdrafts

The most generous fee-free overdraft buffers tend to be offered on premium or packaged current accounts.

However, there are a handful of free options if a decent overdraft is your top priority.

We have rounded up the best options in our regularly updated guide here, but below are a few of our top picks.

First Direct’s First Account often comes top of the polls for customer service, and it offers the largest interest-free overdraft buffer at £250 - after that it charges interest at 15.9 (EAR) per cent. Switchers currently get £125 cash to sign up, and the account requires a £1,000 monthly deposit or you'll have to pay a £10 monthly fee for it.

M&S Bank's Current Account offers a £100 fee-free buffer and also charges 15.9 EAR per cent. It currently pays £125 in vouchers if you switch and then £5 per month for a year. It also requires a £1,000 per month deposit.

The Club Lloyds account also offers the same £100 fee-free buffer plus it comes with 2 per cent in-credit interest on balances of up to £5,000. You must pay in at least £1,500 per month to avoid a £3 monthly fee.

Nationwide's Flex Direct account offers to waive borrowing fees and interest for the longest at 12 months - the agreed limit will depend on your individual circumstances. After that there is a flat 50p charge each day to use an authorised overdraft or £5 for unauthorised borrowing. The account also offers the opportunity to earn 5 per cent interest on balances of up to £2,500 paid every month, which could be worth up to £125.

Both Santander's Everyday Current Account and 123 Current Account give a four month grace period to switchers. The Everyday option has no added extras and no monthly fees. The 123 Account costs £5 per month to run but you get 1.5 per cent interest on up to £20,000 and up to 3 per cent cashback on household bills.

For a gimmick-free overdraft, Tesco Bank offers a flat rate of interest at 18.9 per cent on authorised or unauthorised borrowing. There is also a free Overdraft Control service that will stop any payments being made if it will take you into or increase your unagreed overdraft. The account also pays 3 per cent on balances up to £3,000 and Clubcard points for spending.

Can I still move banks if I am overdrawn?

The simple answer is yes. Most banks will ask you what your existing overdraft limit is when you sign up to switch and match it.

You will need to speak to your new bank to make sure but most will still accept you if you are overdrawn and you should still be able to use the 7-day switching service to move overdrawn.

Do you want to automatically post your MailOnline comments to your Facebook Timeline?

Your comment will be posted to MailOnline as usual

We will automatically post your comment and a link to the news story to your Facebook timeline at the same time it is posted on MailOnline. To do this we will link your MailOnline account with your Facebook account. We’ll ask you to confirm this for your first post to Facebook.

You can choose on each post whether you would like it to be posted to Facebook. Your details from Facebook will be used to provide you with tailored content, marketing and ads in line with our Privacy Policy.